The financial services Commission of Ontario (FSCO) is embarking on a product suitability review that aims to assess whether consumers have access to appropriate information to make informed decisions when purchasing life insurance. This scrutiny has financial advisors nervous about the possibility of new compliance requirements.
“We’re going to be conducting a review,” says Anatol Monid, director of market conduct with FSCO, “to understand and assess the process that life insurance agents use at the point of sale to make suitable recommendations for prospective policyholders.”
FSCO’s review will focus on the interaction between insurance advisors and clients at the point of sale, including the needs-assessment process, product recommendations and disclosures, as well as on how advisors assess the financial literacy of their clients.
A questionnaire will be distributed by email to a randomly selected sample of insurance advisors. Some survey respondents will be selected for followup.
As a benchmark for the review, FSCO will use a set of best practices developed by four industry associations in 2007, which are outlined in a paper entitled The Approach: Serving the client through needs-based sales practices. Monid says FSCO hopes to determine the extent to which advisors already follow those guidelines, and whether the guidelines are relevant.
The FSCO review comes about a year after the Canadian Council of Insurance Regulators (CCIR) recommended that provincial regulators begin conducting such reviews regularly.
“Both insurance agents and insurers have an important role to ensure consumers are empowered to make informed decisions and are presented with products that are suitable to their needs,” the CCIR said in its position paper regarding the managing general agency channel. “Regulators have a role to verify that these two outcomes are achieved.”
Given this guidance from the CCIR, other provinces are likely to follow Ontario’s lead in launching its suitability review.
The FSCO initiative doesn’t necessarily mean the regulator has identified suitability as a problem in the insurance sector. FSCO has indicated that it does not receive a high volume of client complaints related to insurance product suitability.
“While there are suitability issues out there, it’s not a common issue,” Monid says. “We think it’s important for us to understand what’s occurring in the marketplace. So, for us, this is primarily an information-gathering exercise.”
Insurance-sector associations are confident that the review won’t reveal deficiencies in existing suitability practices. The sector has established many of its own standards regarding suitability, including the needs-based sales practices set out in 2007.
“There’s a lot of suitability information out there that’s been put out by the [sector] and by insurance companies,” says Susan Allemang, head of regulatory and policy affairs with Mississauga, Ont.-based Independent Financial Brokers of Canada. “There’s a whole wealth of information that’s available.”
The low volume of insurance suitability-related complaints suggests that insurance brokers are largely adhering to the sector’s guidelines, says Ed Skwarek, vice president of regulatory and public affairs with Advocis in Toronto: “That suggests that you really do have a very compliant financial advisor base. [Regulators] have yet to demonstrate through any facts that there is a problem.”
Still, these types of reviews tend to raise concerns that more regulation is on the way, Skwarek adds: “That’s always the risk.”
Insurance advisors are particularly wary of the prospect of new suitability requirements, given the extensive rules that have been imposed concerning this topic on the investment side of the business.
“In many instances, they’ve gone way too far,” says Brian Shumak, an independent financial advisor and owner of Brian Shumak Financial Services in Toronto. Although he applauds initiatives to protect consumers, he believes compliance-heavy rules generally aren’t effective in preventing the bad apples from acting inappropriately.
“I think the vast majority of advisors practice in the best interest of the client,” Shumak says, “independent of whether there is a formal or informal responsibility.”
Shumak already conducts a thorough needs analysis when advising his clients on life insurance, and he keeps detailed records of client meetings, even though he is not formally required to do so. Still, he worries that formal suitability requirements would make the process more cumbersome. “The tools that are out there,” Shumak says, “are more than enough.”
Given that the insurance regulators’ approach to regulation is typically more policy-based than rules-based, sector players are optimistic that insurance advisors won’t end up facing the same prescriptive suitability requirements that they face on the investment side.
“I think you’re going to see FSCO – and possibly other jurisdictions – saying we will just provide guidance, as opposed to needing to do anything prescriptively,” says Skwarek. “Before we would see any sort of heavy-handed regulation, it would be discussed with the [sector] first, and [regulators] would demonstrate that there was a problem that absolutely required action.”
Regardless of the outcome, insurance associations urge advisors to ensure their suitability practices are adequate. Allemang emphasizes that brokers should keep full records of their discussions with clients so they could be relied upon if there is a dispute.
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